Pictet, Lombard Odier to Drop Centuries-Old Bank Structure

Pictet and Lombard Odier, Geneva’s
biggest private banks, plan to reorganize their structures in a
move that may presage the end of Swiss bankers assuming
unlimited personal liability for losses.

The banks will establish corporate partnerships overseeing
limited companies as of Jan. 1, pending regulatory approval,
they said in separate statements. The managing partners will
continue to own and manage the firms, without unlimited
liability for the limited companies.

Swiss banks are aiming to improve their access to
international markets while increased international scrutiny of
offshore havens and declining revenue crimp the margins on $2.1
trillion of cross-border business booked in the Alpine country.
The U.S. Department of Justice indicted Switzerland’s oldest
bank, Wegelin & Co., last year as part of a probe of at least 11
Swiss financial firms.

“Swiss private banks traditionally bragged they were the
safest in the world, with principals assuming personal liability
for the bank’s actions,” said Jeffrey Morse, a private client
attorney with Withers LLP in Geneva. “The principals were
comfortable assuming liability over managed portfolios, but
given recent events with the U.S. authorities, they may be
revisiting the issue. The liabilities may now be too much to
bear.”

Private Bankers

Pictet, established in 1805, and Lombard Odier, whose 1796
founding makes it Geneva’s oldest bank, have used the
trademarked badge of Swiss “private banker” to differentiate
themselves from their larger rivals with investment-banking
arms: UBS AG (UBSN), which was forced to accept a $59.2 billion bailout
in 2008, and Credit Suisse Group AG, both based in Zurich.

The closely held model favored in Geneva requires at least
one partner to have unlimited liability for the bank’s
commitments. That pledge earns them the private banker label
enshrined in law in 1934 and registered as a trademark in 1997
with the Swiss Federal Institute of Intellectual Property.

Under the new legal structures, the eight managing partners
at Pictet and eight managing partners at Lombard Odier will
retain unlimited liability for the corporate partnership while
relinquishing liability for the underlying companies, including
their banks in Switzerland.

‘Increasingly Complex’

The new legal structure will make it easier for Pictet “to
grow and adapt in an increasingly complex international
environment,” Jacques de Saussure, senior partner at Pictet,
said in the statement.

It will “maintain the benefits of a private partnership”
in line with international norms on corporate structures,
according to Patrick Odier, senior partner at Lombard Odier.

“The situation around partners’ liability has changed
fundamentally,” said Alessandro Bizzozero, a Geneva-based
lawyer providing regulatory and compliance advice to banks,
adding that other smaller firms may also discard the traditional
structure. “A private bank’s liability may extend to creditors
or to state authorities. The Wegelin case is an example of
that.”

Old Structures

Pictet and Lombard Odier will leave the Swiss Private
Bankers Association when the changes take effect, leaving nine
smaller private bankers deliberating whether to continue with
the old structures. Bordier & Cie, Mirabaud & Cie and Gonet &
Cie in Geneva and La Roche & Co. in Basel, Switzerland, said
they don’t plan to adapt in the same way.

“We have thought about all these problems and about the
structure of the company and we decided not to change anything
yet,” said Michel Juvet, one of four partners at Bordier, a
family-run private bank established in 1844. “For clients,
having someone in front of them who is personally totally liable
for his assets should make a difference.”

“Our bank has no intention to change its legal
structure,” Christoph Gloor, one of six general partners at
226-year-old La Roche., said in an e-mailed statement. Officials
at Mirabaud and Gonet said the banks prefer their current
structures. The other five private bankers weren’t immediately
available or declined to comment immediately by phone.

Bank Motives

Pictet and Lombard Odier’s motive for switching legal
structures isn’t to remove liability from partners, the two
firms told reporters at a joint press conference in Geneva
yesterday. Furthermore, the existing liability arrangements will
continue for three years after the new formations take effect in
2014, according to de Saussure.

“Wegelin wasn’t in any way the trigger for this
evolution,” said Nicolas Pictet, a managing partner at Pictet &
Cie. “What happened to Wegelin would have had the same effect
on either legal structure.”

The reorganization will help shed light on the performance
of firms in Geneva’s secretive banking industry. While both
Pictet and Lombard Odier already disclose assets under
management, they will publish an annual report from 2014
providing results for the first time.

Managed Assets

Both firms said their profitability was better than that of
Switzerland’s two biggest banks. UBS, Julius Baer Group Ltd. (BAER),
the nation’s third-biggest wealth manager, and Vontobel Holding
AG (VONN) all reported declines in their full-year margin figures for
private banking this week.

Pictet said it had 374 billion Swiss francs ($412 billion)
of client assets at the end of December, including assets held
in custody. The firm, which recorded 13 billion francs of net
inflows and added 100 employees last year, plans to reveal
assets under management later this month.

Lombard Odier said its managed assets were 164 billion
francs. Including custody, they were 188 billion francs,
compared with 36 billion francs overseen 20 years ago.

The private bankers are reforming complex legal structures
to satisfy possible concerns from foreign regulators as they
extend abroad, according to Peter Boeckli, a lawyer with
Boeckli, Bodmer & Partner in Basel, who has advised Lombard
Odier.

“The partnership was an idea of the 19th century,” said
Boeckli. “These banks have had a huge growth in assets under
management and now have a much larger international presence.
Carrying on in this way is unacceptable for the authorities.”